[Chart courtesy of MarketWatch.com]

1. Moving the market

After yesterday’s Federal Reserve’s policy change, the bulls took charge early, propelling the Dow and S&P 500 to record highs. This surge was bolstered by a report showing weekly jobless claims fell by 12,000 to 219,000, significantly below estimates.

The tech sector embraced a “risk-on” mood, with Nvidia and AMD shares soaring around 5% and 4%, respectively. Other major tech stocks like Alphabet, Meta, and Micron also saw gains of 2% or more. The Fed’s decision to cut interest rates further benefited the banking and industrial sectors, with JPMorgan, Caterpillar, and Home Depot all seeing positive impacts.

The unexpected 0.5% rate cut, rather than the anticipated 0.25%, surprised Wall Street. Some analysts viewed it as a panic move, while others criticized it as an attempt to benefit the current administration ahead of the elections.

Despite differing opinions, today’s rally erased the S&P 500’s early September losses, pushing the index up by 1.2% for the month. Over 375 of the 500 index members posted gains for the day.

Small Caps and the Nasdaq led the charge, with the MAG7 basket reaching its August all-time highs. Although the most shorted stocks initially surged, they eventually leveled off and closed unchanged.

Bond yields were mixed, with the 10-year yield inching up slightly, while the dollar remained directionless. In contrast, Bitcoin marched higher towards the $64,000 mark, with the ARKB ETF gaining 5.3%. Gold also rallied towards its record highs but fell short.

The divergence between stocks and the 10-year yield remains as pronounced as ever.

How long can this unusual trend continue?

[Chart courtesy of MarketWatch.com]

1. Moving the market

Ahead of the Federal Reserve’s first interest rate cut in four years, the major indexes showed little change, with the magnitude of the easing remaining a significant unknown. However, after a midday bounce, the major indexes sold off and closed in the red.

Historically, the Central Bank has typically signaled its next move to the markets, but this time, traders were left in uncertainty about whether a hoped-for supersized cut would materialize.

Introducing a new cutting cycle is primarily intended to stimulate a stalling economy, but it also supports the markets, which are already close to new all-time highs. This is unusual, as in the past, stocks were typically struggling when such interest rate policy changes occurred.

The Fed ultimately lowered its overnight lending rate by 0.5%, a larger move that Wall Street had expected, though it appeared to me as a crisis cut. To address concerns, Fed Chair Jerome Powell emphasized that this aggressive move was not due to a troubled economic outlook but rather because the upside risks to inflation had significantly decreased.

He believes that inflation is receding and that this trend is sustainable, though I remain skeptical, recalling past admissions that inflation was not transitory.

The most evident “pumping and dumping” occurred with Small Caps, which fed off the most shorted stocks. The dollar experienced its own roller coaster ride, followed by gold, which spiked to a new record before surrendering gains after Powell’s speech.

Bond yields tumbled throughout the session but surged higher towards the end. Most asset classes experienced whipsaw movements, including Bitcoin, which briefly surged over $61k before sliding into the close, mirroring crude oil’s pattern.

This chart compares the Consumer Price Index (CPI) of the 1980s with the current environment. If history repeats itself, we may face several years of climbing inflation before achieving the much-desired reversal.

Again, I believe the Fed’s aggressive rate cut will effectively increase inflation and lead to further economic instability.

[Chart courtesy of MarketWatch.com]

1. Moving the market

Better-than-expected retail sales provided an initial boost to the broad markets, while Microsoft’s announcement of a quarterly dividend hike further supported the tech sector. Additionally, Intel’s plans to make its foundry business a subsidiary led to a nearly 4% surge in its stock price.

Retail sales reportedly rose by 0.1% in August, a significant divergence from the anticipated 0.2% decline. Even when excluding autos, the figure still increased by 0.1%, though this was below the forecasted 0.2%.

Despite extensive discussions about tomorrow’s anticipated Federal Reserve rate cut, the current consensus is now pricing in a 70% chance of a 0.50% easing, a notable increase from Friday’s 47% probability.

A steeper rate cut could have unintended consequences, with traders potentially questioning the health of the economy, which historically has negatively impacted the S&P 500:

This scenario also brings inflation concerns back to the forefront, as inflation remains far from being under control, with the threat of stagflation still looming. Furthermore, the interest on U.S. debt has surpassed $1 trillion for the first time and is expected to reach $1.6 trillion by year-end. The August budget deficit, which exploded to a record high, exacerbates this issue.

If you think inflation has been conquered, think again. These deficits will have to be paid for with newly created money, potentially driving inflation into overdrive and sending gold prices soaring.

In the end, the major indexes saw little change, clinging closely to their respective unchanged lines. Small caps experienced volatility, with the most shorted stocks leading the charge but ending the session unchanged. The MAG7 basket followed a similar pattern, fading into the close.

Bond yields edged higher, allowing the dollar to rally modestly, which in turn pulled down gold from its lofty levels. Bitcoin surged above $61k, using yesterday’s dip to $58k as a springboard, while oil prices displayed a similar bullish trend.

Once again, we are witnessing a divergence between the S&P 500 and global liquidity, prompting ZeroHedge to ask:

Will global liquidity catch up to the equity market’s optimism?

[Chart courtesy of MarketWatch.com]

1. Moving the market

Early in the session, the Dow Jones reached record territory, but the S&P 500 and Nasdaq struggled to maintain their initial bullish momentum, with the Nasdaq slipping below its unchanged line.

Traders are eagerly awaiting one of the Federal Reserve’s most anticipated policy meetings, where the likelihood of the first rate cut since 2020 is nearly certain. The main question is the magnitude of the cut, with a 0.25% reduction almost guaranteed, while a 0.5% cut remains more speculative.

The Nasdaq fell by approximately 0.5%, driven by a decline in Apple shares due to longer shipping times and weaker demand for the iPhone 16 Pro models. Despite a challenging start to the month, the S&P 500 is less than 1% away from a new all-time high and could reach that level if the market reacts positively to the Fed’s announcement on Wednesday.

A rate cut is expected to support the struggling economy by lowering borrowing costs for companies, potentially boosting earnings growth and, in turn, economic growth and stock prices. However, history suggests that this outcome is not guaranteed.

As the Nasdaq declined, the MAG7 basket also moved lower, with Apple and Nvidia leading the losses, each dropping over 2%. Bond yields fell, with the 10-year yield closing at its lowest level since June 2023.

The dollar weakened, gold consolidated and ended nearly unchanged, while Bitcoin followed the tech sector’s trend, giving up some recent gains. Oil prices found support, rebounding from recent lows, and reclaiming the $70 level.

As we await the Fed’s interest rate decision, the 10-year yield and the Nasdaq are in a deep divergence. This raises the question: Who will lose this tug-of-war?